Investments: Option trading 101

Raiderboost

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I can't remember but are you required to have a margin account to trade options?
 

Reframmellator

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Trading options ramps up the the complexity of a "normal" investment by a huge order of magnitude and has substantial risks which are not alway obvious. The people selling option trading services gloss over these aspects and if you are good enough to make money trading options on your own you'd likely be working for Goldman Sachs or another big investment bank. Our financial advisor is ranked by Barron's as one of the top 250 in the country and she advises against options. When I was younger I thought I was smart enough to trade a few options and I lost money, fast.

If this formula makes sense to you, go for it, lol. :)

View attachment 8926863
You're getting the engineers all hot, you know . . . .

IIRC, that model got Scholes a Nobel Prize in Economics.

Options are a risky investment. High risk, high reward. The best long-term strategy, in my opinion, is an age/situation-appropriate asset allocation plus time.

I agree with most of what tahoebum is saying. The Boglehead strategy certainly works. The advisors we're working with combine a core of passively traded ETFs with targeted stock/active fund selection. We're beating the portfolio weighted average index - not by much - by doing this. When I was managing my own IRA, I was able to beat the weighted average index - not by much, but I beat it - with a different strategy. Once I picked an asset allocation, I picked actively traded funds with a record of outperforming their categories in up and down markets, with expense ratios below category averages. I signed on with an advisor last year for four main reasons: 1) it was a lot of work to keep up with monitoring the portfolio, and I wasn't keeping up; 2) I had multiple funds in so many asset classes that my portfolio was starting to look like a high-cost total market index fund; and 3) I'm close enough to retirement that I wanted expertise to prevent us from making any really big mistakes; and 4) if anything happened to me, I'd want my wife to be able to have the financial assets part of her life covered after making a phone call.

In many ways, managing one's assets is like building a golf swing:
  1. some do it on their own and do a great job
  2. some do it on their own and do a lousy job
  3. some try to get there with one quick score/one lesson
  4. some try to get there by sustained commitments to coaching and effort
Choice 4 delivers the best results for the most people. There are no guarantees, but it's the best bet. You have to make sure you have a suitable coach/advisor, you have to be committed to the process, and you have to have some raw material to work with.
 

Gman79

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I can't remember but are you required to have a margin account to trade options?
Most treat it separately. There is no rquirement for the trade so if you want you can trade all you want without needing large sums of cash to "own" the rights. Margin is just a loan from the Fin. Institute. That is a whole nother risk you take and that is when you better be very smart and careful. because that has caused a lot of people to go upside down and lose out of trades.
 

OGputtnfool

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Anyone know anything about "warrants" as they relate to investing?
 

wubears71

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Anyone know anything about "warrants" as they relate to investing?
Warrants are just like call Options except they are issued by the company and when the warrant is executed by the person awarded the warrant, the stock gets diluted since new shares are in the market. It’s an OTC thing and not really an exchange thing. Think of it as stock options awarded to an employee that has an expiration date On it.
 

OGputtnfool

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Warrants are just like call Options except they are issued by the company and when the warrant is executed by the person awarded the warrant, the stock gets diluted since new shares are in the market. It’s an OTC thing and not really an exchange thing. Think of it as stock options awarded to an employee that has an expiration date On it.
Makes sense. So, if I'm understanding them, if you buy 1 Warrant for Company XYZ for $30 with the option to execute for $11, then you're in it $41, right? If the stock is selling at $70 now, what's the difference between executing now and getting your $70 stock for $41 versus waiting for the stock to hit $100 and executing? Either way, you're still getting it for $41. The advantage is if it drop below $41, then you only lost $30 instead of $41 (or $70), right?
 

Bryndom

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Options feel like tools where you are trying to predict floors and ceilings in the market; it’s incredibly tough to do and darn near impossible to be consistent about it...
 

Midman03

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I'd be surprised if there isn't an investment banker/stock broker on this site that can answer this question. Either way, I only trade stocks (sometime day trade penny stocks - thank you GNUS!) and have no idea how options work. I stay away from those evil things! Heard of too many horror stories!
 

OGputtnfool

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I actually have three calls out for Ford that are doing really well right now. They don't make me rich, but I'm learning.Screenshot_20200608-232822_Robinhood.jpg
 

colemanBro

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I don't agree with the fact that big risks bring big rewards because sometimes it happens that a big investment in some non-profitable business can only bring loans that will take you into the negative. You need to invest wisely, as well as engage in trading because this market is full of dangerous and experienced competitors who know much more about it than you can imagine. It is for such cases that I found on the Internet https://www.onlytradeschools.com/ where you can find out all the details of this case and not be deceived. Just try
 
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M2Giles

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Given the time I can dedicate to research and my appetite for risk, I avoid options trading.

Unless you really understand what's going on, and you can closely monitor those details, you are effectively gambling. Lots of risk, upside of a big pay day, but retail normally doesn't win in the long run.
 

TexasHacker34

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I would honestly rather take the money and bet on sports, I don't seeing it being much different
 

M2Giles

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I would honestly rather take the money and bet on sports, I don't seeing it being much different
Probably a better strategy for most retail traders. Options trading only good thing is to add volitilty but even then I'm sure too many people get in over their heads only looking at the upsides compared to ridiculous amount of risk.

At least if you're at the sports book in Vegas you get free drinks
 

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What do I need to know about option trading? My kid has a friend who's apparently into it and he wants to try it. Everything I know says it's very high risk. Where can I educate myself?
I don’t know scat about it but do know I won my Econ 101 at college by going 100% in on Playboy. I forget the NYSE sign but I was about 40% up that year, in my virtual classroom money.

I got an A that wasn’t expected. I was just being the class clown.
 

millsan1

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Not my cup of tee, but if it is funny money, go for it. Could hit, could drop, but enjoy
 

smgoldstein

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So, is it safe to say I can lose more than is in my account?
If you buy options you can only lose what you invest. If you short options then you can have a problem.

Also buying cheap out of the money puts is a way to hedge ones portfolio-as long as you are aware of the risks.
 

JakeSilva231

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You should read the reviews of popular binary options brokers. This will help you understand which platform is right for your circumstances. I, for example, know that there are good reviews of a broker IQ Option. This broker seems to provide a good training for beginners and allows you to open a demo account.
 
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Datkison

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I've been using options for about 5 years now. I don't "trade" options but use them to leverage my money for long term investments. Buying deep in the money LEAPs calls have low risk and cost very little in "time value". Also selling covered calls is a way to make a little income on your holdings that aren't super volatile. One rule of thumb to remember is do not sell calls on a stock that you aren't willing to sell. You can roll the calls up if the stock hasn't moved too much but if its had a huge run up then you lose out on that profit and are unlikely to be able to roll. No doubt buying OTM calls or selling naked calls is gambling, especially short term as you don't know what the market will do in the short term. But there are ways to do things with limited downside and unlimited upside.
So, let me see if I get this right. It's entirely possible that I watched that entire 1 hour video and still don't understand it.

If I buy a call option for $3 with a strike price of $125. That means I paying $300 up front for the option to buy $12,500 worth of shares before expiration. If the share price reaches $150, then I want to buy it because I'll effectively make $25/share or $2500, right?

Assuming that's all accurate, what if I don't have $12500 in my account? Can I buy them and immediately sell them for $150/share so I simply get $2500?

So, my max loss in that scenario would be $300 with unlimited potential gains, right?
To clarify this situation, you would buy to open Call 125 for $300 and if the share price reached $150 at the expiration you could sell to close at ~$25 netting yourself ~$2200. Now let's say it had reached that share price and you still had a month until expiration, there would still be some time value in the price of the option and you may be able to sell it for $25.50 or $26 depending on volatility. I have a book somewhere that was very good when I was learning about options so when I find the title I will let you know.
 

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🤯

I’m not an ignorant man, but I have no idea on this, Econ 101 and ‘02 are failing me.

I will say in one of those classes we were given “10k” to invest. Being the naturally shy and non-controversial person that I am I sank it all into Playboy stock. Professor wasn’t real happy with that particularly when I won, in a couple months I turned it into 15k+. Sticking with the horse I bought, Playboy.

I did it more as a joke but I had the highest ROI of anyone.

Sex sells, baby! That’s why I rarely post a swing vid, some things are not meant for a family friendly place.

By that I mean you’ll usually see a craptastic golf shot followed by a lot of 4 letter words... like crap, dang, and if I’m really agitated a good “fart(s)!”

Kidding, kidding. I cuss much more than that weak sauce.

I don’t get futures trading although when oil was -30.00 a barrel I was trying to figure EXACTLY how many I could cram in my house. To me that meant they were paying me $30 to take every barrel?

I know it’s not that simple, and I have made investments, but when my potential out of pocket is more than the original investment, I’ll stay away.
 

Bryndom

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You're getting the engineers all hot, you know . . . .

IIRC, that model got Scholes a Nobel Prize in Economics.

Options are a risky investment. High risk, high reward. The best long-term strategy, in my opinion, is an age/situation-appropriate asset allocation plus time.

I agree with most of what tahoebum is saying. The Boglehead strategy certainly works. The advisors we're working with combine a core of passively traded ETFs with targeted stock/active fund selection. We're beating the portfolio weighted average index - not by much - by doing this. When I was managing my own IRA, I was able to beat the weighted average index - not by much, but I beat it - with a different strategy. Once I picked an asset allocation, I picked actively traded funds with a record of outperforming their categories in up and down markets, with expense ratios below category averages. I signed on with an advisor last year for four main reasons: 1) it was a lot of work to keep up with monitoring the portfolio, and I wasn't keeping up; 2) I had multiple funds in so many asset classes that my portfolio was starting to look like a high-cost total market index fund; and 3) I'm close enough to retirement that I wanted expertise to prevent us from making any really big mistakes; and 4) if anything happened to me, I'd want my wife to be able to have the financial assets part of her life covered after making a phone call.

In many ways, managing one's assets is like building a golf swing:
  1. some do it on their own and do a great job
  2. some do it on their own and do a lousy job
  3. some try to get there with one quick score/one lesson
  4. some try to get there by sustained commitments to coaching and effort
Choice 4 delivers the best results for the most people. There are no guarantees, but it's the best bet. You have to make sure you have a suitable coach/advisor, you have to be committed to the process, and you have to have some raw material to work with.
I’m a Wall Street engineer and I approve of this message. Many of the tricky, complicated, obsfucated financial products exist to enrich those already at the top. Margin and option trading can yield incredible rewards and come with indescribable risk. There’s a reason most Wall Street traders enjoy trading with other peoples money.
 

EstebanTornado

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Ok. So I posted trading covered calls and cash secured puts, but other than wild swings in stock price, and buying well established stocks, I’m trying to figure what is the downside if you’re just trying to capture premium, and not really concerned about actual stock price.
I have a lot of AAPL shares and I am getting really good income weekly so far from doing this.
I’m sure I’m not seeing the big picture, but I am doing my research, and there might be a better ways to invest other than buying and holding as I’ve always done.
 

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